In mid-course shift, government talks growth, overlooks fiscal deficit
Finance minister presents plan to tame inflation, hopes it would drop to 6%-7% by March end.
By ET Bureau | Updated:
NEW DELHI: In a subtle shift in policy, the government has indicated that sustaining growth will take precedence over meeting the fiscal deficit target indicated in the February budget.
The finance ministry has budgeted a fiscal deficit of 4.6% of GDP for the current year, but most experts don’t give North Block a remote chance of meeting the target.
“We have to be careful not to over-do ourselves in reaching this target since that can have an excessive slowing down impact on growth,” finance minister Pranab Mukherjee said in Parliament while making a suo-motto statement on inflation.
“This (4.6%) is a difficult target, given the deterioration in the global economy and its impact on India over the last 3 to 4 months,” he said on Tuesday. The shift in stance, which implies that the government may tolerate a higher fiscal deficit to prevent growth from dropping sharply, opens up the possibility of a dramatic mid-course correction.
The industrial growth had dropped to a two-year low of 1.9% in September, prompting some independent experts to predict GDP growth of less than 7% in 2011-12. In 2008-09, at the height of financial crisis GDP growth had dropped to 6.8%.
To prevent a repeat, the finance ministry may not insist on sharp curbs on expenditure, as it did a few months back, and also may not raise taxes in a bid to shore up revenues. The disinvestment target may also be revised downwards if the North Block settles for a higher fiscal deficit, as it does not make sense to sell shares cheap in the current markets.
The government has already provided for extra borrowing of Rs 53,000 crore in the current fiscal, maintaining that this is to meet the shortfall in small savings collections, a logic the market has not bought.
The recent auctions of government bonds have not found many takers, as the market expects even more bor-rowings at higher rates later in the year. The yield on ten-year benchmark paper has firmed up to near 9% from about 8.13% at the beginning of the current fiscal.
The finance minister assured the Parliament that the UPA government was committed to bringing down prices and asked states to do their bit on policy agenda to fight off prices rise. Mr Mukherjee presented a plan to the Parliament to tame inflation on the first day of the winter session, expressing the hope it would drop to 6%-7% by March end.
FM attributed the high and sticky inflation to a combination of domestic and international factors, and said the rise in prices of select food items and fuel was defeating the efforts to tame prices.
“In these three months, certain food items namely, fruit and vegetables, egg, meat, fish and milk have been the major contributors to food inflation. Along with fuel and power items, which exhibited a rising inflation in October, it has led to the stickiness in headline inflation,” he said.
However, FM’s statement failed to satisfy the Left, which reiterated its resolve to move an adjournment motion in Parliament on rising prices.
The finance ministry has budgeted a fiscal deficit of 4.6% of GDP for the current year, but most experts don’t give North Block a remote chance of meeting the target.
“We have to be careful not to over-do ourselves in reaching this target since that can have an excessive slowing down impact on growth,” finance minister Pranab Mukherjee said in Parliament while making a suo-motto statement on inflation.
“This (4.6%) is a difficult target, given the deterioration in the global economy and its impact on India over the last 3 to 4 months,” he said on Tuesday. The shift in stance, which implies that the government may tolerate a higher fiscal deficit to prevent growth from dropping sharply, opens up the possibility of a dramatic mid-course correction.
The industrial growth had dropped to a two-year low of 1.9% in September, prompting some independent experts to predict GDP growth of less than 7% in 2011-12. In 2008-09, at the height of financial crisis GDP growth had dropped to 6.8%.
To prevent a repeat, the finance ministry may not insist on sharp curbs on expenditure, as it did a few months back, and also may not raise taxes in a bid to shore up revenues. The disinvestment target may also be revised downwards if the North Block settles for a higher fiscal deficit, as it does not make sense to sell shares cheap in the current markets.
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The government has already provided for extra borrowing of Rs 53,000 crore in the current fiscal, maintaining that this is to meet the shortfall in small savings collections, a logic the market has not bought.
The recent auctions of government bonds have not found many takers, as the market expects even more bor-rowings at higher rates later in the year. The yield on ten-year benchmark paper has firmed up to near 9% from about 8.13% at the beginning of the current fiscal.
The finance minister assured the Parliament that the UPA government was committed to bringing down prices and asked states to do their bit on policy agenda to fight off prices rise. Mr Mukherjee presented a plan to the Parliament to tame inflation on the first day of the winter session, expressing the hope it would drop to 6%-7% by March end.
FM attributed the high and sticky inflation to a combination of domestic and international factors, and said the rise in prices of select food items and fuel was defeating the efforts to tame prices.
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“In these three months, certain food items namely, fruit and vegetables, egg, meat, fish and milk have been the major contributors to food inflation. Along with fuel and power items, which exhibited a rising inflation in October, it has led to the stickiness in headline inflation,” he said.
However, FM’s statement failed to satisfy the Left, which reiterated its resolve to move an adjournment motion in Parliament on rising prices.
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